Thursday, December 26, 2013

A weekend article in The New York Times examined the
ideological underpinnings of the bitcoin cryptocurrency. While the
article got most of it correct, it missed some additional principles
that are core to the adopters of bitcoin.

First of all, a vote for
bitcoin is essentially a vote against the established monetary order
with its centralized authority, legacy infrastructure, and diminishing
financial privacy. Moreover, it is also a vote for an individual’s
choice in currency and freedom of transaction without payment blockades
and surveillance. To both the technical and non-technical, bitcoin
represents fungibility, irreversibility, and user-defined privacy.

As The New York Times
pointed out, additional facets that bitcoin adopters find attractive
include how bitcoin demonstrates the absurdity of a central bank’s
unlimited issuance model and the irrelevancy of self-serving capital
controls.

A decentralized cryptocurrency separates a functioning medium of exchange from state control.

Nothing
illustrates this more starkly than a physical bitcoin on a coin-shaped
metal disc, which could be considered a negotiable monetary instrument
in some jurisdictions. Lately, bitcoin has appreciated so much that the
older 10 BTC and 25 BTC Casascius coins must now be declared to US Customs when entering or exiting the US.

FinCEN’s involvement

On November 27th, Casascius founder Mike Caldwell received
a letter from FinCEN, the US Treasury bureau responsible for
safeguarding the financial system from illicit use and combating money
laundering. The letter implied that his three-year-old business of
selling coin-shaped pieces of metal could be defined
as a money services business requiring registration with FinCEN and
possibly registration with the money transmitter regulators in each
individual state.

The FinCEN claim rested largely on the premise
that Caldwell had no way of verifying that the coins were being shipped
to the same person, or persons, that purchased the items with bitcoin.
Caldwell believes that the coins should be viewed as collectibles.

Subsequently, Caldwell suspended
operations of his coin-shaped metal business and ceased taking orders
for purchases of new product. He also engaged legal counsel to ascertain
if his business was indeed acting as a money transmitter under the law.

In
telephone conversations with Caldwell, he reiterated to me that the
ongoing operation of his business was secondary to establishing the
important freedom-to-contract principles and choice in currency
principles.

According to Caldwell, he took the drastic step to suspend
as a precaution, however he does not believe that he is in violation of
any existing laws as he is only sending empty private keys in the mail.

Business model

Under
the current business model, Casascius receives an order and the payment
received does not involve any US currency or any other countries’
currency. He accepts bitcoin for the sale of a round metal disc with a
private key attached under a hologram. The strong reputation of
Casascius and its process is paramount to the success of a physical bitcoin, because it involves trusting the integrity of a third party.

During shipment, the coin-shaped piece of metal is valueless and corresponds to a bitcoin address containing zero
bitcoin. When the recipient receives the coin-shaped piece of metal, an
appropriate amount of bitcoin is transferred to the corresponding
public key, or bitcoin address.

In
an alternate approach, Casascius could send the coin-shaped metal and
allow the recipient to initiate the transfer of bitcoin to the
corresponding bitcoin address, thereby removing Caldwell from handling
the bitcoins at all. In that scenario, Caldwell would not be handling US
dollars or bitcoin so it would be difficult to see how any possible
money transmission was occurring.

Recalescence Coins, LLC in Port Orchard, WA has already moved to the model of selling blank coins as a result of the FinCEN letter received by Casascius.

Caldwell
and his attorney plan on responding to the FinCEN letter, describing
their process and outlining a satisfactory business model.

Casascius uses brass tokens in the shape of a coin. Another business based in the UK sells similar coins. Other companies could just as easily use rectangular plastic or special paper
to store a hidden private key. They could even be divided, sent
separately, and re-joined later to form a complete private key. However,
the requirement to separate a private key would mean sending empty private keys in the mail somehow represents a form of money transmission which it does not.

Form factors

Also,
form factors matter legally, or they should. Phil Zimmermann faced a
somewhat similar situation when he could not export his email encryption
program, Pretty Good Privacy (PGP), due to US restrictions on the
exporting of encryption with “munitions-level” strength. A group of
volunteers then transcribed the computer code line-by-line into a book
format to export PGP as a book to be re-transcribed and compiled on the
other side.

Money is the speech of commerce and “we need freedom of speech in our financial commerce,” says Mike Gogulski, a stateless ex-American living in Bratislava, Slovakia.

The Liberty Dollar case
exemplified how far a government will go when alternatives to the
compulsory unit of account begin to emerge. The Liberty silver coins
containing real silver were embarrassing to the government that was
issuing the fake silver coins, so the public had to be protected from
thinking that the real silver coins were actually money. Huh? Government
prosecutors in the case laughingly described Bernard von NotHaus as
representing a “unique form of domestic terrorism“.

All money is an illusion at
some level, because like language and religion, its proliferation and
success depends on growing adoption from an increasingly larger pool of
adherents.

The creator of the Bitcoin protocol gave the world a
method to conjure up its own monetary illusion. The reason this is a
gift is because, prior to bitcoin, other monetary illusions depended
either on legal tender laws for their illusory value or physical objects
like gold and diamonds which are easily confiscated.

Bitcoin put
the power of “survivable” money directly in the hands of the masses. It
is a testament to bitcoin’s survivability that it still exists today.

Bitcoin
is not permitted to exist because various governments are
bitcoin-friendly or pledge to support innovation. Bitcoin exists today
precisely because it is distributed and decentralized, designed to
outlast political institutions.

And, it is beyond confiscation because
it is digital. If it could be eradicated, it would have been eradicated
as soon as it broke out of its niche market with a few pizza deals back
in early 2010.

I understand from sources that approximately twelve
such letters were issued by FinCEN in the last 30 days. If so, the
purpose hopefully is to better understand these bitcoin business models
and not just to use impressive letterhead in persuading voluntary
business suspensions. In the case of Casascius, I fear the latter.

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About Me

I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.

"Free-market protagonists, such as Matonis, regard cybercash as better than traditional government-issued or -regulated money, because it is determined by market forces and thus nonpolitical in nature." --Robert Guttmann, Professor of Economics at Hofstra University, in Cybercash: The Coming Era of Electronic Money, 2002

"Matonis is quite correct that the new technology makes easier the use of multiple private currencies." --Mark Bernkopf, Federal Reserve Bank of New York, in "Electronic Cash and Monetary Policy", 1996

"Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies." --Seth Godin in Presenting Digital Cash, 1995